The Quick Ratio for both companie shows they do not have enough quick assets to

The quick ratio for both companie shows they do not

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due to Home Depot’s purchase of two companies in 2017. The Quick Ratio for both companies shows they do not have enough quick assets to pay for its current liabilities meaning both companies may be over-leveraged, struggling to grow sales, paying bills too quickly, or collecting receivables too slowly. Home Depot has been attempting to reassure investors that growth will pick back up, indicating this being the reason the ratios are so low. ASSET MANAGEMEN T FY 17 FY 18 Total Asset Turnover: The Home Depot 2.27 2.46 Costco Wholesale, Corp 1.02 1.01 Average Collection Period: The Home Depot 7.1 6.5 Costco Wholesale, Corp 4 4 Comments: Home Depot’s Total Asset Turnover increased slightly in 2018, turning over their assets nearly 2.5 times each year while Costco was only able to turn over their assets one time each year. Costco’s Average Collection Period was more favorable that Home Depot averaging four days vs. seven days, respectively, but this may mean they have stricter policies in place that might push customers to seek supplies elsewhere in the future. DEBT MANAGEMEN T FY 17 FY 18 Total Debt to Total Assets: The Home Depot 0.61 0.66 Costco Wholesale, Corp 0.16 0.15 Times Interest Earned: The Home Depot 13.96 14.85 Costco Wholesale, Corp 28.94 32.77
Comments: Comparing the Total Debt to Total Asset of the two companies, Home Depot’s is higher, indicating they about 60% of its assets are being financed with the remaining financed by the shareholders. Costco is only financing about 15% from creditors. The higher the ratio, the higher the risk of a company defaulting on loans if the market suddenly shifts, but the ratio does fail to address the quality of the assets. Analyzing the Times Interest Earned Ratio, Home Depot sat around 14 and Costco, at around 30. The number indicates Costco earns interest longer than Home Depot, making it more able to service its debt. However, the higher the number might also indicate the company has a low level of leverage. Since Home Depot’s number is low means they have fewer earnings accessible to meet interest payments. PROFITBILITY FY 17 FY 18 Net Profit Margin: The Home Depot 8.6% 10.23% Costco Wholesale, Corp 2.3% 2.5% Return on Assets: The Home Depot 19.4% 25.3% Costco Wholesale, Corp 7.7% 8.1% Return on Equity: The Home Depot 593.5% -592.2% Costco Wholesale, Corp 24.5% 24% Modified DuPont Equation, FY18: The Home Depot Costco Wholesale, Corp Net Profit Margin: 10.3% 2.45% Total Asset Turnover: 2.46 1.01 Equity Multiplier: -23.43 2.62 -5.9252 (-592.52%) 0.0648 (6.48%) Comments: Home Depot’s Net Profit Margin is favorable compared to Costco and better positioned to generate profit. Additionally, Home Depot’s Return on Assets is more than 20% higher than Costco indicating Home Depot is potentially earning more with less investment. However, the Return on Equity for 2017 was extremely high at 583%, but in 2018 was negative 592%. The high ROE is probably being driven by high debt levels, and their growth is dependent on a heavy debt burden, which impacted the company hard in 2018. In 2018, Home Depot faced a huge drop in the housing market and its sales, which likely caused the ROE to drop so much.

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